As been said many times before, cash is king for the life of any business for the long-term. With that in mind, managing accounts receivable is an integral part of ensuring that cash is consistently coming into the business to cover not only expenses but needed reinvestments in the business for future growth. These reinvestments can be in the form of new employees as well equipment and additional locations. As a result, accounts receivable is not only important to the finance team but is even more important to the senior management team because it will enable executives to implement their growth strategy only if their financial house is in order. In other words, successful cash management facilitates company growth.
Accounts receivable is the amount of money that customers owe for services or products that the company provided to their customers. The fact that there are accounts receivable is not bad in itself; however, it is bad if the amount of accounts receivables is not in line with the industry or common business practices. As an executive, you want to make sure that your finance team has the right accounts receivable practices in place. Below are some steps to help to manage accounts receivables:
- Properly Track and Monitor Your Accounts Receivable
Most accounting or practice management systems have some way to track accounts receivables. Make sure your business is using it appropriately. Your system should know by type of client and by payer type what is owed and also be able to track trends in payment cycles. This information will help you figure out who are the best paying and worst paying customers. This is important because if your worst paying customers are coming from one industry type then it make sense for the business to stop pursuing that particular type of customer. In addition, your accounts receivable monitoring should include a dashboard on dollars outstanding by delinquency bucket and the movement (i.e. trends) between the buckets in order to inform you of any positive or negative trends in accounts receivable movement month to month. Also, this accounts receivable dashboard should monitor how your business’ accounts receivable compares to industry norms.
2. Record Sales and Payments Promptly
By recording sales and payments as soon as possible, you are able to invoice the customer with the most recent and accurate information. Incorrect invoices are the most common reason for customers not to pay on time. In addition, it eats up staff resources to investigate customer invoice errors.
3. Establish and Adhere to Credit Policies
I have many clients who have well thought out credit policies in place but do not follow them. The credit policies were created for a reason, to prevent accounts receivable accounts to become severely delinquent but also to maintain good relationships with clients that are not severely delinquent. Some key components of any credit policy are:
- Assessment of the customer’s ability to pay
- Firm limit on extending additional credit for delinquent accounts
- Standardized collection processes for each delinquency cycle. For example, for clients who are 10 days past due, a “sorry did your check get lost in the mail” communication would go out to the client. If that same client progresses to the next stage of delinquency, 30 days past due then a soft collection letter would go out.
4. Offer Multiple Client Options for Payment
By offering different payment options such as credit cards and cash then accounts receivable can greatly be reduced. However, any non-cash option must make sense for your business because there is a cost for these non-cash options. Credit card companies charge businesses a fee of 3-5% of the transaction amount for credit card processing services. In addition, clients should have multiple ways to pay – – phone, web and in-person.
5. Offer Discounts for Early Payment
As part of your credit policy, you should have terms set out for clients for early pay discounts. Your company’s policy may be not to offer early pay discounts. The decision for early pay discounts depends on the immediate cash needs of your individual business. By getting clients to pay early through a discount you can internally finance project less expensively than a bank; however, if your business is not in need of the money in less than a 30 day pay cycle then it makes no sense to offer a discount. In addition, if you are a business with few competitors and in high demand you may be able to have tighter customer pay cycles, example payment due upon receipt instead of 30 days, since clients that have fewer competitive choices will not be able to go elsewhere for more favorable payment terms.
Managing accounts receivable does not have to be difficult. The key is to keep on top of it through execution of written credit policies and continual and consistent monitoring. By doing this you will be able to respond to negative trends immediately and ensure the financial health of your business.
10.10.11 | More Small Businesses Selling Receivables
Karen E. Klein of Bloomberg Business Week has a very interesting article on how the economic crisis and lack of bank financing with businesses that do not have the picture of perfect health are financing their businesses by selling receivables which is also known as factoring. To read the full article…